Could a taxable security-service provider buy customer-controlled equipment for resale when the customer could keep it free or buy it for $1 after the contract?

Plain-English summary

A security-services provider supplied door and window monitors and motion detectors under two-year taxable service contracts. Customers could either buy the equipment for a nominal price such as $1 at the end or keep it for no additional charge.

The Comptroller said the provider could use a resale certificate under either plan for equipment transferred to the customer's care, custody, and control as an integral part of the taxable service. The provider's entire service charge was taxable, whether or not equipment was separately billed.

If equipment carried a separate charge, tax was based on that actual customer charge—not the provider's cost or the equipment's depreciated value. With no separate equipment charge, no additional equipment tax was collected beyond tax on the total service charge.

The provider owed tax on equipment that was not transferred to the customer's care, custody, and control. The letter also cautioned that the answer would differ for a business merely selling property rather than providing a taxable service.

STAR now flags this historical letter and directs readers to Rule 3.285 for specific guidance on care, custody, and control; the alert says the rule was amended November 1, 2017.

What this means for you

The 1991 analysis turned on whether equipment became part of a taxable service and passed into the customer's care, custody, and control. A nominal or zero end-of-contract price did not by itself defeat resale treatment in that service context.

Common questions

Could the provider buy the equipment tax-free for resale? Yes, under both described plans, if the customer received care, custody, and control.

Was the total security-service charge taxable? Yes.

How was a separate equipment charge taxed? On the actual amount charged to the customer.

What equipment remained taxable to the provider? Equipment not transferred to the customer's care, custody, and control.

Citations and references

• 34 Tex. Admin. Code Rule 3.285 — resale certificates and sales for resale; STAR flags a November 1, 2017 amendment for current care-custody-control guidance

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9107L1123D13

Original ruling text

ALERT: For specific guidance relating to the care, custody and control of TPP when providing a taxable service, please see Rule 3.285, Resale Certificates; Sales for Resale (amended 11/01/2017.

July 22, 1991

Dear **:

Thank you for your recent letter, which was assigned to me
because Al Van Allen is on vacation. As I understand it,
your client provides security services. As part of the
service, your client supplies to its customers security
equipment, including door and window monitors and motion
detectors.

You describe two promotional plans, by which a customer will
enter into a two-year security services contract with your
client, and will receive in exchange either: (a) An option
to purchase the equipment for a nominal price (such as
$ 1.00) at the end of the contract; or (b) An option to
keep the equipment at the end of the contract for no
additional charge. You ask the following questions:

1. May the service provider issue a resale certificate to
   purchase the equipment tax free under either situation (a)
   or (b), or both?

Answer: Under both plans, your client may issue a resale
certificate to purchase, tax free, equipment that is
transferred to the care, custody and control of the customer
as an integral part of the taxable security service.

If your client were not providing a taxable service, but
were simply selling tangible personal property, this answer
would be different. Your client would have to pay tax on
equipment given away for no charge. And as for the nominal
resale price, we would have to further explore whether the
transaction were a bona fide purchase for resale, as opposed
to a mere attempt to evade the sales tax.

The inquiry changes, however, when we are discussing the
transfer of tangible personal property as part of a taxable
service. Whether or not there is a separate charge for
materials, the service provider's total charge is taxable.
This charge includes, theoretically, the service provider's
cost of doing business plus some margin for profit. The
tangible personal property, if any, that is transferred to
the care, custody and control of the customer as part of the
service may be purchased tax free by the service provider
regardless of whether there is a separate charge made.

It follows that in both situations you describe above, the
absence of a separate charge for the tangible personal
property, or the presence of only a nominal separate charge,
should not affect the service provider's entitlement to
purchase the equipment tax free with a resale certificate,
provided the equipment is transferred to the customer's
care, custody and control.

The service provider owes tax on the purchase of equipment
that is not transferred to the customer's care, custody and
control.

2. Must the service provider collect tax from the customer
   on the equipment under either situation (a) or (b), or both?

Answer: As discussed above, the service provider's total
charge to the customer for taxable services is taxable.
This includes any separate charge for the equipment in
question. Where there is no separate charge made, there is
no basis for collecting additional tax from the customer.

3. If the answer to (2) is yes, then should the service
   provider collect tax based on the actual charge to the
   customer, the service provider's cost, or the depreciated
   value of the equipment at the time of sale?

Answer: In the situation you describe, any additional tax
would be based on the actual charge to the customer for the
equipment, and not the seller's cost or the depreciated
value of the equipment.

Once again, this answer would change somewhat if we were
talking about a seller of tangible personal property, as
opposed to a provider of taxable services, or if we were
talking about equipment that is not transferred to the care,
custody and control of the customer.

This opinion is based on the facts presented. Different
facts, though similar, might lead to different answers. If
you have further questions, feel free to write or call me at
1-800-252-5555, ext. 3-3889.

Sincerely,

John Christian
Attorney
Tax Administration